Volatility in the Markets: The Golden Rules from Behavioral Finance

Financial markets are experiencing a new wave of volatility, driven by shifting geopolitical news. While macroeconomic factors often explain market fluctuations, investor reactions can be influenced by cognitive biases, emotions, and collective behaviors. Behavioral finance provides insights into the biases that affect investors and the golden rules to circumvent them, especially during times of uncertainty.
Analysis with Edouard Camblain, Investment Advisor and Behavioral Finance Expert at Societe Generale Private Banking.

What is Behavioral Finance?

A discipline explored for over ten years at Societe Generale Private Banking, behavioral finance is defined by the application of psychology to finance: it distinguishes itself from classical financial theory by considering individuals not as purely rational beings but as influenced by their emotions and reasoning biases. By shedding light on the psychological mechanisms at play in our investment decisions, it allows for a better understanding of our reactions and encourages reflection to strengthen the decision-making process.

The 5 Golden Rules from Behavioral Finance

Awareness of cognitive biases enables us to identify golden rules applicable to investing:

1. Understanding the biases of mimetic behavior and action (which push us to imitate widespread movements and act at all costs) and regret aversion (the fear of missing an opportunity) should encourage us to exercise discernment and avoid hasty actions. Sometimes, doing nothing can be the most relevant solution.

2. Integrating the availability heuristic (the limitation to easily accessible and simplified information) and the recency effect (the memory of the most recent information) in our decisions should lead us to look beyond the most accessible or media-driven information, which may not necessarily be the most relevant for making a decision.

3. Considering the disposition effect (the sharper perception of the pain of losses compared to the pleasure of equivalent gains, as well as the capping of that pleasure) invites us to reason without considering the unrealized gains/losses of an asset and not to choose to sell our assets based solely on this criterion. It is not the purchase price (anchoring bias) that should guide a decision, but the asset's future prospects.

4. The recognition of mental myopia (the predominance of short-term considerations) should alert us to maintain a broader perspective that allows us to stay invested by developing a long-term approach (a typical market cycle lasts about five years). Fluctuations are inherent to financial markets. When well exploited, in the long term, they can be a performance driver.

5. Finally, being aware of the emotions tied to investing should encourage us to adopt a methodological rigor and to consult with a trusted third party before making emotionally influenced decisions. Stabilizing our decision-making criteria is key to avoiding mood swings.

Expert Support for Navigating Financial Markets Smoothly

Investing in the markets requires fine expertise, relevant information, and discernment to circumvent behavioral biases. Whether you wish to maintain management of your assets, benefit from advice from experienced managers, or delegate all or part of your portfolio management, we offer a range of support solutions tailored to your strategy, knowledge, and desired level of delegation.

Your Private Banker is at your disposal for any further information.